(Illustration via iStock)
Continental Breakfast: your daily update on what’s happening in Europe.
Yesterday was a big day for Big Law, with news of no fewer than three transatlantic mergers.
Eversheds and Holman Fenwick Willan—the U.K.’s 13th- and 29th-largest law firms by revenue—both ended their long-running search for a U.S. combination, while Dentons emerged as a possible savior for the struggling European arm of King & Wood Mallesons.
The merger between Eversheds and Sutherland Asbill & Brennan would create a new global giant, with 2,300 lawyers and 61 offices, making it the world’s 9th-largest law firm by headcount, according to The American Lawyer’s latest Global 100 survey. Its combined revenue of around $800 million—split roughly 60:40 between the U.K. and U.S. firms—would also be enough for a spot in the global top 50 by that metric.
The deal hasn’t been formally approved—the two partnerships are due to vote by the end of the year. But the fact that the firms have issued a joint statement announcing the talks shows that both are extremely confident that the merger will go ahead.
Eversheds, a U.K.-based midmarket firm with a broad practice and 1,900 lawyers globally, is no stranger to mergers. The firm was formed in the late 1980s by a four-way combination of regional U.K. practices and has completed numerous other domestic and international deals over the past 15 years.
Securing a U.S. presence has been a priority at Eversheds for several years and the firm’s partnership voted in 2014 to overwhelmingly approve a search for a transatlantic merger. Eversheds came close to merging with Foley & Lardner last year, but those talks broke down after the Milwaukee-based Am Law 100 firm decided not to proceed.
Eversheds and Sutherland have not provided any detail as to whether the two firms will be financially integrated, but sources indicate that will not be the case. It is notable that the word “merger” does not appear once in the joint statement. Instead, the firms refer to “joining forces” via a “combination” and “transaction.”
That to me suggests the use of a Swiss verein—a holding structure that allows members to retain their existing forms.
Almost every major cross-border combination of the past five years has utilized the verein, including those that formed Dentons, DLA Piper, Hogan Lovells, King & Wood Mallesons, Norton Rose Fulbright and Squire Patton Boggs.
It’s easy to see the appeal: Vereins allow combining firms to sidestep issues around balancing disparate profitabilities and reconciling contrasting tax, accounting and partner compensation systems. Those issues can be particularly challenging in trans-Atlantic combinations, with the cash-based accounting systems and calendar fiscal year favored by most U.S. firms clashing with the accrual-based accounting setups and April 30 financial year end common among U.K. firms.
It is slightly surprising, then, that Holman Fenwick opted against the verein for its transatlantic deal. Its tie-up with Houston’s Legge, Farrow, Kimmitt, McGrath & Brown, revealed by The American Lawyer yesterday, is a conventional merger. The pair will be fully financially integrated once the deal takes effect on January 3, 2017, with Legge Farrow switching from its cash-based accounting and calendar fiscal year to adopt HFW’s accruals system and March 31 year end.
HFW senior partner Richard Crump told me that a verein was never on the table. “I’m sure the vereins are very successful, but philosophically and culturally, we like to be one worldwide profit-sharing firm,” he said. “We see a big advantage in terms of cohesion, collaboration, client service and culture in being one firm.”
The deal gives HFW, a 450-lawyer firm with leading shipping and aviation practices, a foothold in a market that is crucially important to its energy sector clients. For Legge Farrow, a 20-lawyer civil litigation specialist, it provides scale and international capability that the firm says will help it win larger and higher-value mandates from clients.
Finally, it has emerged that Dentons is in talks with KWM’s beleaguered European practice.
KWM Europe looked to be under threat after its partners comprehensively rejected a financial rescue deal from the firm’s Asia arm, despite having being told that they may have to repay two years’ worth of profits if the deal was not approved. (A leading expert in partnership law says it would be practically impossible for the firm to claw back the profits, however.)
That KWM is in talks is unsurprising. The firm said in a statement announcing the failure of its recapitalization that its European management board was now “considering a range of strategic options, including mergers.” The firm also recently held recently held unsuccessful talks with Morgan, Lewis & Bockius.
For Dentons, it would almost be more of a shock if the firm wasn’t in some form of merger talks. Dentons is seemingly on a one-firm mission to consolidate the entire legal industry. The firm completed no fewer than six combinations in the last fiscal year, including a tie-up with 4,000-lawyer Chinese giant Dacheng. The various deals increased Dentons’ revenue by over 65 percent, from $1.28 billion to $2.12 billion. It also almost tripled the firm’s head count, which now stands at more than 6,500 lawyers, making it comfortably the world’s largest law firm by that measure—a full 2,200 ahead of the previous holder of that title, Baker & McKenzie.
Dentons has a number of similarities with KWM. Both are expansive international vereins with significant Asian components. In fact, thanks to the Dacheng deal, Dentons now has more lawyers in China than any other country, meaning it is classed as a Chinese law firm for the purposes of The American Lawyer’s surveys. It seems KWM’s European arm may be swapping one Asian bailout for another.
U.K. Government-Owned Bank Fails Key Stress Test
Royal Bank of Scotland has failed the Bank of England’s annual stress test of the U.K. banking system.
The bank, which is 73 percent owned by British taxpayers after being bailed out by the government in 2008, responded by announcing plans to raise at least 2 billion pounds ($2.5 billion) in additional capital.
Barclays and Standard Chartered also failed parts of the so-called stress test, which submits banks to hypothetical scenarios such as a contraction of the global economy and a fall in house prices. Barclays already has plans to bolster its capital, while Standard Chartered was judged to already have adequate capital in place.
The Bank of England warned of a “challenging period of uncertainty” caused by issues such as Brexit, the impending Italian referendum on major political reform and Donald Trump’s election as president of the United States.
The news will not help the U.K. government’s attempts to offload more of its majority holding in RBS, with the sale process recently put on hold due to a massive impending fine from the U.S. Department of Justice.
The government sold 5 percent of RBS last year at a 1 billion pounds ($1.25 billion) loss and had intended to continue to dispose of its shares in the bank, but the organization managing the government’s investment has said that the disposal is being held up by uncertainty over the DoJ fine.
RBS is one of a number of European lenders targeted by the DoJ over the mis-selling of toxic residential mortgage-backed securities in the run up to the financial crisis. UKFI chairman James Leigh-Pemberton told a government committee earlier this month that the RBS fine could exceed $12 billion and had stifled investor demand for the bank’s shares.
Deutsche Bank announced in September that it had been asked by the DoJ to pay $14 billion to settle similar claims. The German lender’s share price crashed over 20 percent on the news, although it rallied weeks later following reports that the pair were close to agreeing a significantly reduced settlement of $5.4 billion.
RBS has a large panel of external legal advisors, including Allen & Overy, Ashurst, Clifford Chance, Linklaters and Simmons & Simmons.
Freshfields Bruckhaus Deringer advised the Bank of England on its bailing out of RBS in 2008, and also acted for the government on its sale of a 5 percent stake in the bank in 2015.